Carina Ltd Costing Analysis Report: Management Accounting Module

This report provides a detailed analysis of Carina Ltd's costing methods, focusing on the application of different techniques to optimize production costs. The report begins with an executive summary and introduction, outlining the company's background and current scenario. It then delves into the calculations of total manufacturing costs using three methods: planned production costs, direct material and labor costs, and activity-based costing (ABC). A comparison among these methods is presented, highlighting the advantages of ABC in identifying cost drivers and improving efficiency. The report also explores the implementation of ERP systems and concludes with recommendations for Carina Ltd to reduce costs and enhance profitability. The report emphasizes the significance of management accounting tools in addressing costing issues and reducing waste in resource utilization.

MANAGEMENT
ACCOUNTING

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
INTRODUCTION...........................................................................................................................1
TASK ...........................................................................................................................................1
Background of Carina Ltd...........................................................................................................1
Current scenario..........................................................................................................................2
1. Calculations:............................................................................................................................2
A).Total manufacturing costs as per cost planned production:...................................................2
B).Total manufacturing costs per box for each product implementing total of direct material
and labour costs as the allocation base: ......................................................................................3
C). Total manufacturing as per activity Based costing:..............................................................4
2 Compare amongst all three methods:.......................................................................................5
3. Activity based costing.............................................................................................................6
4. ERP.........................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

EXECUTIVE SUMMARY
Under this report, various tools is used by the firm in order to lower the costs. In present
day period, many-sided quality is business is developing on a regular basis. At the point when an
organization need to extend their business, they need to confront different issue identifying with
costing of their creation, showcasing, finding appropriate wellspring of obligation and so forth.
Carina Ltd. is fundamentally a glass maker organization however they are changing their
concentration as indicated by the request of business condition.
Matt Smith, general administrator of Carina Ltd is worried about benefit of individual product
offerings. Cited organization has set cost of their products by utilizing benchmarking procedure.
Cost of their things are practically equivalent to the comparable existing items. GM imagine that
as opposed to concentrating on generation process, they should focus on unit based costing. Part
of data and information relating fabricating process is required in for finding the fundamental
changes that is expected to done by cited firm keeping in mind the end goal to lowering their
production cost.
INTRODUCTION
Management accounting is significant for solving various problems of an organisation.
By using various tools of costing, company can reduce wastage of scare resources and enhance
their sales in long run. Carina limited is a glass manufacturing enterprise, MY group is their
parent company. Carina is operating in various part of this world and they are producing glass
ornaments, tableware etc. This report will discuss about present method of costing which cited
firm is using in their organisation (DRURY, 2013). Some modern tools of management
accounting will also become part of this project because they play significant role in reducing
overall production cost.
TASK
Background of Carina Ltd.
In modern era, complexity is business is growing on continuous basis. When a company
want to expand their business, they have to face various issue relating to costing of their
production, marketing, finding proper source of debt etc. Carina Ltd. is basically a glass producer
company but they are changing their focus according to the demand of business environment.
Cited enterprise is known for their premium quality and affordable pricing. This is possible
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because of innovative technology and proper use of management accounting tools. Most of their
products were used in restaurants, hotels and houses. Because of their sound financial position,
they expanded their business across the globe (Fogliatto Da Silveira and Borenstein, 2012). This
expansion process stared after the end of second world war.
After sometime, management of Carina Ltd. analysed that business of glass tableware is
going down. This incident forced cited company to explore other options. After conducting some
extensive research they figured out they there is a huge scope in the business of glass ornaments.
This enterprise had a great image in market and they use innovative technology in their
production process. Management decided to use these merits in order to grow earn high amount
of revenue and provide stability to the organisation. Cited firm leased a factory in Australia for
manufacturing of small, large and speciality glass ornaments.
Current scenario
Matt Smith, general manager of Carina Ltd is concerned about profitability of individual
product lines. Cited company has set price of their commodities by using benchmarking
technique. Price of their items are almost equal to the similar existing products. GM think that
instead of focusing on production process, they should concentrate on unit based costing. Lot of
information and data relating manufacturing process is required in for finding the necessary
changes that is needed to done by cited firm in order to cut down their production cost. Accounts
department has to play important role in attaining this objective. Carina Ltd. is using volume
based costing for calculating cost of every box. Instead of allocating costs to each production
line, book-keeper of cited enterprise think that they should allot overheads like direct material
and labour to each product. Carina Ltd. is using one process manufacturing of their three types of
ornaments. This system create issues relating to ascertaining profitability. Their are various
issues like treatment of depreciation, administration cost etc. which make a huge impact on the
costing method of cited company (James and Savitz, 2011).
1. Calculations:
A).Total manufacturing costs as per cost planned production:
Product
Number of
Ornaments
Ornament per
box Total boxes
Small coloured glasses 840000 12 70000
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Large coloured glasses 600000 6 100000
Speciality glasses 200000 1 200000
Cited company Produces different boxed of each product.70,000 boxes of small coloured
glasses are produced, 1,00,000 boxes of coloured glasses are produced, and 2,00,000 boxes are
manufacture. Hence, total overheads costs is divided on their each total boxes production.
Total overheads costs is also bifurcated in a most effective manner.
Particulars of overheads
costs Annual costs
Production scheduling 170000
Machine set up 320000
Equipment depreciation 440000
Factory depreciation 300000
Quality inspection 140000
Packaging 670000
Factory administration 300000
Total Overheads Costs 2340000
Particulars
Small coloured
glasses
Large coloured
glasses
Speciality
glasses
Direct labour and material 280000 500000 1400000
Production scheduling 32158 45940 91880
Machine set up 60536 86480 172960
Equipment depreciation 83243.24 118918.92 237837.84
Factory depreciation 56756.76 81081.08 162162.16
Quality inspection 26486.48 37837.84 75675.68
Packaging 126756.75 181081.08 362162.16
Factory administration 56756.75 81081.08 162162.16
Total Manufacturing Costs $722694 $1132420 $2664840
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B).Total manufacturing costs per box for each product implementing total of direct material and
labour costs as the allocation base:
Under this, the total manufacturing costs is to be calculated by allocating entire
manufacturing costs as per the direct labour and material proportionate. Hence, in the following
situation, each product cost is calculated by allocating manufacturing overheads in direct labour
and material costs.
Particulars
Small coloured
glasses Large coloured glasses
Speciality
glasses
Direct labour and material 280000 500000 1400000
Production scheduling 21834.8623853211 38990.8256880734
109174.31192660
6
Machine set up 41100.9174311927 73394.495412844
205504.58715596
3
Equipment depreciation 56513.7614678899 100917.431192661 282568.80733945
Factory depreciation 38532.1100917431 68807.3394495413
192660.55045871
6
Quality inspection 17981.6513761468 32110.0917431193 89908.256880734
Packaging 86055.0458715596 153669.724770642
430275.22935779
8
Factory administration 38532.1100917431 68807.3394495413
192660.55045871
6
Total manufacturing costs 580550.458715596 1036697.24770642
2902752.2935779
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So, the total manufacturing costs of each product is calculated in an effective manner.
Under this method, total manufacturing costs can segregated in a most effective manner.
C). Total manufacturing as per activity Based costing:
Activity cost pool Planned overheads Cost drivers
Production scheduling 170000 Number of batches
Machine set up 320000
Machine operations per
operation
Equipment depreciation 440000 Machine operations per
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operation
Factory depreciation 300000 Factory area per box
Quality inspection 140000 Number of batches
Packaging 670000 Number of batches
Factory administration 300000 Factory area per box
Small coloured glasses Large coloured glasses Speciality glasses
Batches 1600 1500 1000 4100
Machine 3360000 2400000 1000000 6760000
Factory area 0.09 0.045 0.018
Total Factory area 6300 4500 3600 14400
Product Small coloured glasses Large coloured glasses Speciality glasses
Direct labour and labour 280000 500000 1400000
Production scheduling 66341.4634146341 62195.1219512195
41463.414634146
3
Machine set up 159053.25443787 113609.467455621
47337.278106508
9
Equipment depreciation 218698.224852071 156213.017751479
65088.757396449
7
Factory administration 131250 93750 75000
Quality inspection 54634.1463414634 51219.512195122
34146.341463414
6
Packaging 261463.414634146 245121.951219512
163414.63414634
1
Factory Administration 131250 93750 75000
Total manufacturing 1302690.5 1315859.07 1901450.42
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costs
By applying Activity based costing approach, this has been seen that small coloured
glasses have total manufacturing costs is 1302690.50, and large coloured glasses have
1315859.07, speciality glasses have 1901450.42.
2 Compare amongst all three methods:
Comparison amongst small coloured glasses, large coloured glasses and Speciality glasses is
defined
Basis of difference Small coloured
glasses
Large coloured
glasses
Speciality glasses
Total Manufacturing
costs as per planned
production
$722694 $1132420 $2664840
Total manufacturing
costs by allocating
costs as per direct
labour and material
$580550.45 $1036697.24 $2902752.29
Total manufacturing
costs as per ABC
approach
$1302690.5 $1315859.07 $1901450.42
From the above report, this has been seen from the above mentioned report that, ABC
approach is used in order to make their business operations effective and efficient in a most
effective manner. Cost is analysed in a most efficient manner so that the cited firm is able to
achieve its pre-set objectives in a most efficient manner. This is the main advantage which has
been used by the business through applying ABC technique (Morris, 2011). Hence, this is the
most effective tool which is required to be adopted by way of applying management accounting
tools. The manufacturing overheads costs are used in an optimum manner by way of applying
management accounting tool. ABC approach is the modern tool which is used in order to lower
the manufacturing costs so that their business can sustain for the long run effectively. Other
methods are outdated which were used by the firm so that they could run effectively.
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3. Activity based costing
Calina limited should adopt activity based costing where cost incurred on consumption
of various activities are analysed in a proper way. If a company has adopted sound process than
then they can easily reduce their production cost. ABC system will help cited firm in finding the
activities which are not adding anything in the profitability of a product. By minimising or
finishing this work, Calina Ltd can increasing their profit without putting enhancing their overall
sales. This system will support this company is improving their efficiency which is essential for
their long term success. Wastage of resources is a big concern for cited enterprise. They do not
have scarcity of various resources but optimum utilisations of funds and human capital is
necessary for improving performance of the company (Weygandt, Kimmel and Kieso, 2015). If
they minimise their wastage then they can use these resources in other productivity areas which
will increase their profit in short period of time.
ABC system play crucial role in identifying various information which can help in
reducing overall cost of production. Cited company do not need to adopt all of them, they should
only focus on an strategy which they can smoothly implement in their organisation. It is difficult
to focus on whole process in one time, but by adopting this system management can concentrate
on various activities and individual attention can provide surprising result to Carina ltd. Their are
other methods of accounting which fail to classify the different between value adding and non –
value adding activities. This system help in pricing policy of a product, most of the companies
fail to decide correct price of their items because of various issues relating to costing. By
adopting ABC approach, this enterprise can set an affordable price which will earn they
maximum return and keep their customers happy. Carina ltd is popular for their quality product
and affordable pricing, this method can would be most suitable for them.
Implementation of ABC system is a complex process, cited firm first need to find all of
their overhead costs and than bifurcate big overhead expenditure. Focusing on major expenses
can reduce the production cost in less time, company would also not spend too much time of
small issues if they identify and concentrate of big expenditure (Negahban and Smith, 2014).
After this, cited firm must look for few activities which they may perform in upcoming time. If
the number of activities is less then their production and costing process would be simple.
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Appropriate measure, cost driver, should be selected for finding tracing the activity so necessary
changes can be made in appropriate period of time.
Besides some advantages, ABC system also have many demerits which Carina ltd should
not forget before implementing this method of costing. Execution of ABC is very expensive, this
system may put some extra pressure on the financial resources of cited company. A consultant
can be needed at initial stage, he/she may charge huge amount on money for deliver his or her
services. ABC do not follow follow accounting standards, it is not used for external reporting.
This issue creates problems of misinterpretation of information. Manager of cited company may
face trouble at the time of making a call because the data which they will using for making long
term plan could not represent the correct position of the different process.
ABC system can be expensive but it has can reduce wastage of important resources. This
is will make a positive impact on long term profitability of an organisation. Cited firm has deep
pocket so they can adopt this method of accounting (Govindan, Khodaverdi and Jafarian, 2013).
Generally, small companies do not like to use this system because it create huge burden of
additional cost of their financial resources.
4. ERP
ERP is a business software which help management of company in managing various
resources and activities. It assist an enterprise by integrating different tasks, automation is using
for performing various functions of back office (Annamalai and Ramayah, 2011). Designing of
ERP system is a complicated process, managers of cited firm may find this system difficult to
operate. Instead of brings simplicity in business, implementation of this system can bring
complexity in decision making process. Management of Carina ltd have to recruit skilled people
in the organisation so they can use this modern software in an effective way. Hiring experienced
and educated worker will be challenge at initial stage (Shaul and Tauber, 2013). If they try to
teach their existing workforce about ERP system then it will take lot of time and they have to
spend huge amount on their training. Cited company may face issues relating to sharing of
information, sometime two departments do not share necessary data with each other. This issue
decreases efficiency of software.
ERP vendors has to tell service users about various benefits of this ERP soft-wares. In
modern business environment optimum utilisation of available resources is essential for growth
of a company. They have to use latest technology because it can provide them necessary and
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reliable information in less period of time. Company may found it difficult to implement but
once they start using it they can learn it no time (Monk and Wagner, 2012). They can always
take assistance of ERP vendors by calling the help centre number. Instead of focusing on short
term loss, company must concentrate of long term benefits. Initially ERP can cost huge amount
to the firm but in long run, it will play an important role in reducing overall cost of business.
All the departments of an organisation are inter-linked with each other. Management
accounting system is work on modern tools, ERP is considered as an effective soft-wares which
help in the process of automation of various back office work like recoding of accounting data
etc. Management accounts basically focus on two areas, reducing of cost and increase in sales
(Morris, 2011). ERP minimises wastage of resources and managers can receive all the
information in very less time. Making a consistency in good performance is essential for earning
long term profits. ERP software make an effective process which can assist cited company in
developing a sustainable business.
CONCLUSION
From the above mentioned report, this has been observed that the Carina Ltd was earlier
using volume based coasting method in their operation which now have been suggesting to
implement activity based costing so that their cost per unit can reduce in a most effective manner
in order to get the competitive advantages. Company also tries to implement ERP system in a
most effective manner so that they could get the maximum advantage in the firm.
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